Michael Aron, the UK ambassador to Iraq, said the two warring parties should end the heightened uncertainty for those signing contracts in the semi-autonomous northern region.

"We urge the government in Baghdad with the KRG [Kurdistan regional government] to resolve their differences and reach agreements over hydrocarbon and revenue sharing," he said.

Aron's intervention came in front of the Kurdish prime minister, Barham Salih, during the first ever oil and gas conference to be held in Erbil, Kurdistan where the huge opportunities – but also risks – of operating in this politically volatile part of the world were laid bare.

The revelation last Friday that Exxon – the world's biggest shareholder-owned oil company – had an accord with regional ministers in Kurdistan is threatening to scupper rising hopes of an oil deal between the two governments.

Companies such as Vallares, through its takeover of London-listed but Turkish-based Genel Enerji, have taken a significant gamble on the production sharing agreement it signed many years ago with the Kurds being eventually accepted and ratified by Baghdad.

But the Exxon deal in Kurdistan could blow this off course. The agreement has infuriated the Iraqi government because Exxon is engaged in a completely separate oil deal in the south of the country.

The Iraqis have in the past described the Kurdish agreements as unlawful and on Sunday there were warnings that legal action would be taken in Baghdad against Exxon.

Barham Salih, the Kurdistan head of state, said he was confident that the Exxon deal would not derail moves to agree a petroleum law but he also bared his teeth by referring to past "ethnic cleansing" and "genocide" committed against Kurds by Saddam Hussain and his Iraqi regime.

But Salih was warned by another speaker, Mowaffak al-Rubaie, a former national security adviser and member of the Iraqi parliament, that he should never have agreed the deal. He said Exxon had been warned by people at the highest levels of the Iraqi government not to proceed with the move.

Other political analysts questioned whether Exxon was given a secret nod by Baghdad to proceed with the Kurdish deal. They argue the "row" is being whipped up to satisfy internal Iraqi critics.

Vallares, which will this month change its name to Enel Energy, has thrown its money and efforts into drilling rights obtained in Kurdistan which have never been ratified by the federal government in Iraq. Hayward, the former BP boss who lost his job after the Gulf of Mexico spill, said the intervention of the UK government was helpful: "The British ambassador was imploring both sides to try to come to a resolution. And I would support that request … everyone is getting rather tired [of the long-drawn out negotiations]."

But some Iraqi experts also saw Aron's motivation as an attempt to clarify the situation in the north of the country in support of other larger British interests. One expert said: "The British do not want to see American companies such as Exxon running away with the spoils of the north while BP and Shell fear to go there because they do not want to upset Baghdad."

Kurdistan suffered decades of underinvestment during the Saddam regime but the US Geological Survey believes there may be 45bn barrels of recoverable reserves in place making it the fourth biggest oil province in the world behind Saudi Arabia and others.

Genel already produces 50,000 of Kurdistan's 100,000 barrels a day oil production and has plans to double its own output as well as build a pipeline link that would enable it to export gas through Turkey.

There has been speculation that the US oil company Chevron might also soon announce a deal to move into Kurdistan, while merger and acquisition fever has lifted the share price of smaller London-listed companies such as Afren and Heritage Oil with exposure to Kurdish oil.